INTERCO TRANS

Question 1

What are intercompany transactions?

Answer 1

Transactions between a parent company and its subsidiary where the parent has over 50% ownership

Question 2

When do intercompany transactions get eliminated in financial statements?

Answer 2

When consolidated financial statements are reported, as there is no ‘arms-length transaction’

Question 3

What happens to revenue and expenses from intercompany transactions in consolidated statements?

Answer 3

They are fully eliminated

Question 4

Which items are eliminated from the income statement due to intercompany transactions?

Answer 4

• Interest expenses and their corresponding interest payable
• Sales of inventory and their cost of goods sold
• Service revenues
• Service expenses
• Interest revenue
• Interest expense

Question 5

What account balances must be eliminated in intercompany transactions?

Answer 5

• Accounts receivables
• Accounts payables
• Loan receivable
• Loan payable
• Interest receivable
• Interest payable

Question 6

True or False: Dividends payable to noncontrolling shareholders are eliminated in intercompany transactions.

Answer 6

False

Question 7

What is the treatment of dividends paid or received in intercompany transactions?

Answer 7

Eliminated to the extent of controlling ownership percentage

Question 8

How do intercompany inventory transactions affect financial statements?

Answer 8

They impact revenue, cost of goods sold, and inventory on the balance sheet

Question 9

What is the effect of intercompany sales on gross profit?

Answer 9

Gross profit from intercompany sales should not be recorded and must be eliminated

Question 10

What happens to gains or losses from the sale of fixed assets in intercompany transactions?

Answer 10

They are not recognized until the asset is sold to an outside third party

Question 11

What should be adjusted when a fixed asset is sold between intercompany entities?

Answer 11

Accumulated depreciation should be adjusted to its carrying value

Question 12

How are intercompany gains or losses from land sales treated?

Answer 12

They are unrealized until the land is sold to third parties

Question 13

What occurs when a parent company acquires a subsidiary’s debt?

Answer 13

The debt is considered retired on the consolidated balance sheet

Question 14

How is the gain or loss on intercompany bond transactions calculated?

Answer 14

Price paid to acquire the debt minus the book value of the debt

Question 15

Fill in the blank: All intercompany transactions between parent and subsidiaries should be _______ on the parent’s financial statements.

Answer 15

[100% eliminated]

Question 16

What must be eliminated regarding investments made in bonds?

Answer 16

The respective asset must be eliminated against the portion of bonds payable of the subsidiary

Question 17

What must be eliminated when accounting for premiums or discounts on bond investments?

Answer 17

Any premium or discount on the bond investment